Insiders Strategy Group

Making Your Passion Tax Deductible

With the prep work completed in Part 1: Stealing a Page from the Playbook of the Super-Rich, let’s take a quick look at an example. We will assume for a minute two things. First, you’re employed full time (40-plus hours a week). Second, we’ll make the assumption you love to fish, and because it’s your passion, you look for every opportunity to go to your favorite fishing hole.

Our next step is to turn a passion into a business. Your new LLC is going to be called “Expeditionary Services,” and with the steps listed above, a few business cards, and a little stationary we’ve transformed your hobby into a business.

You’ll begin by telling everyone you know and meet about your offering. You’ll even drop by every hotel and motel in the city and give the concierge a stack of your business cards and one-page description of your fishing guide services. You may even want to provide a commission arrangement for any referral you get from the hotel. Of course, in your tax diary you’ve logged every hotel you contacted, including the name and date of initial contact. You keep track of your miles driven to and from each hotel and you’ve kept receipts for everything properly filed under expenses. You even took the extra step of setting up a separate phone line through Google Voice, which provides nearly free rates, and voicemail that sends a text message to your cell phone when you have a message.

Let’s look at what we’ve accomplished.

The day after you’ve distributed your material, you schedule a journey to a new location. You have no clients, since it’s only been a day, and you head out on what will be your first professional angling trip.

Your MMM log reads: Research new client offering (a new fishing location), time and date. You note the miles to and from, the amount of gas spent and the time spent fishing. You purchase a detailed map of the lake, talk to the locals and purchase the appropriate bait, and you buy that new fishing rod you’ve had your eye on for the last several seasons.

Everything described above was purchased at the asking price, except now you’ve saved at least 35%. I’ll explain why.

“A Loophole Big Enough to Drive a Truck Through”

If you’re in the 35% tax bracket, every dollar you earn and put away for your children’s education, daughter’s wedding or your entertainment actually costs you about $1.52. Here’s the math. If you earn $1.52, the federal government’s bite is 35% or 52 cents. In other words, every dollar you bank, invest or spend requires $1.52 of earnings. It’s the crummy reality of our tax system. It’s also why you must learn to turn all of this bad spending into good spending.

If you don’t know that every dollar you spend requires a much larger amount to be earned, you’ll never get out of the hole (or grave) our government has created for you. With that in mind, let’s look at the expenses associated with your first exploratory fishing trips.

Even if you caught a ton of fish, your day of fishing was expensive by anyone’s standards. That amount, however, isn’t your true cost. Using, again, the 35% tax bracket and your tax number of 1.52, to go on your $503 day trip you had to earn $774.

However, since we’ve established “Expeditionary Services,” this trip’s cost was a true $503. You saved $271. That’s more than 50% of your total out-of-pocket expense.

By establishing an LLC, you’ve converted your hobby’s costs from bad expenses to good ones.

I cannot overemphasize the importance of this. The power of this single expense strategy can make the difference between deciding to be rich or poor.

If your chosen enterprise becomes profitable, each dollar spent is used to reduce each dollar earned. If after your first year’s effort you’ve earned $10,000 and you've spent $10,000, you’ll have most likely the greatest fishing year of your life, accumulated a lot of equipment and been paid to do exactly what you’d wanted to do anyway. Your income from your regular job has stayed exactly the same. However, the expenses that normally chip away at your take-home pay have now become a deduction.

Think for a moment of the possibilities. A “new to you” (used) fishing boat can now be depreciated over time or you can opt for what’s known as a Section 179 expense election and deduct it your first year. An SUV used in your business to tow your new boat now gets the same treatment (see Section 168 and 179 of the Internal Revenue Code).

This is what’s meant by living the dream and it’s not reserved just for the rich. As we demonstrated above, you can do it for far less than you ever thought possible. If you’ve ever questioned why the rich can have so many toys, wonder no further — they are tax deductions.

In Part 3, I’ll discuss how to use your LLC to supercharge this strategy to squeeze every ounce of opportunity from everything you undertake.

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